Poor Infrastructure Makes Imports Cheaper in Indonesia

“Macet”, the Indonesian name for a traffic jam, is one of the most used words in capital Jakarta. Credit: Alexandra Di Stefano Pironti/IPS.

JAKARTA, Sep 17 2012 (IPS) - Indonesia suffers from a malaise: an appalling lack of infrastructure which makes a mandarin orange that travels thousands of miles from Argentina cost nearly the same as another picked locally.

“By average, companies operating in Indonesia must spend 30 percent of their total production costs on transportation,” Latif Adam, an economist from Indonesia Institute of Sciences, told IPS.

“Several studies show that the quantity and quality of infrastructure in this country is not sufficiently conducive to transport Indonesian products from one city to another. Accordingly, foreign products are sometimes cheaper than local ones. This is particularly true in relation to oranges and other Indonesia horticulture commodities,” Adam said.

Not enough roads, airports, ports and power plants makes Indonesia’s infrastructure one of the worst in the region while statistics show the country to be one of the fastest growing economies in Southeast Asia with a GDP of more than 6 percent.

Indonesia is now one of the biggest markets for infrastructure in the world. In fact it’s a dream for any infrastructure company.

“This country needs it all,” said Jacob Friis Sorensen, a Danish businessman and chairman of Eurocham, a private organisation in charge of promoting European businesses in Indonesia.

“Indonesia is one of the most important countries in the Association of Southeast Asian Nations (ASEAN), represents half of all the ASEAN market with more than 40 percent of people and around 50 percent in economic importance,” Friis Sorensen told IPS.

Insufficient expenditure in infrastructure, poor allocation budget, corruption, inefficiency and lack of laws to give security to investors are often cited as major factors hampering the development of infrastructure. But also, Indonesia is an archipelago of 17,000 islands which in itself makes interconnectivity a difficult task.

Indonesia spends less than 5 percent of its budget on infrastructure. Most analysts suggest the government should cut energy subsidies and use that money on infrastructure.

“I believe the government should cut the subsidies gradually and allocate the fund for infratructure, especially economic infrastructure,” Sri Adiningsih, economist and professor at the Gadjah Mada University in Yogyakarta told IPS.

An attempt by the government last February to cut fuel and electricity subsidies was rejected in parliament. Half of Indonesian people live clustered around the poverty line of two dollars a day, making subsidies a primary source of help for the needy.

According to Latif Adam, the infrastructure budget of the government is poorly allocated.

“Spending in infrastructure is, in a significant proportion, allocated for consulting services and planning, monitoring and supervising costs, commitment fees and different corruption cases,” said Adam.

“In addition, it was found that only 16 percent of total infrastructure spending is used directly to build new infrastructure. The remaining 84 percent is allocated to maintain various types of existing infrastructure. However, it was also found that this maintenance cost is insufficient to prevent the degradation in the quality of the existing infrastructure,” Adam told IPS.

The Anti Corruption Commission has found large bank accounts among the members of Budget Commission for infrastructure. “People (in Indonesia) have made a business out of helping others through inefficiency. These people are not interested in seeing solutions,” Friis Sorensen said.

But he also pointed out that “the government wants to do something now. It is a long process but we are getting to the part where we can see something on the ground like the port expansion in Tanjung Priok in Jakarta.”

The Indonesian government has now passed a long time expected law for land acquisition for public development by businesses. Disputes over land ownership and acquisitions had forced developers in the past to delay major projects for years at a time until disputes and compensation claims could be ironed out.

The land acquisition law was followed by the announcement that the United States is looking to cooperate with Indonesia in agriculture and infrastructure.

A European delegate at a recent conference on infrastructure held in Indonesian capital Jakarta said the market for infrastructure projects in Indonesia is dominated by Japanese and Chinese firms.

“European and Americans have little chances. We don’t pay bribes. Our governments should change the way we do business here, we have to play by the rules of Asia,” said the delegate who asked not to be identified by his name.

Indonesian President Susilo Bambang Yudhoyono said recently that around 135 projects under the Indonesian Economic Development Acceleration and Expansion Master Plan (MP3EI) programme have started since its launch in May last year.

He said the programme is necessary to narrow the existing development gap in regions, to reduce the unemployment rate, and to boost the nation’s economic growth through innovation.

To deal with the problem of limited fiscal capacity, the government has launched a public private partnership programme to encourage the private sector to participate in the provision and development of infrastructure.

“But this path has been slow due to complicated regulations, lack of financial guarantees for private companies, delays, and finally, projects offered to the private sector are not well prepared,” Adam said.

When two candidates take to the second round of elections Sep. 20 to become mayor of Jakarta, the talk of the town in one of the world’s most densely populated cities will be infrastructure; it’s the key word in their campaigns.

Jakarta, a city of 10 million people with many thousands more who come everyday to work from neighbouring villages, cannot handle the number of cars, buses, mini-buses and more than five million motorbikes on its obsolete roads, with obsolete public transport.

Many foreign companies in the region have made their headquarters elsewhere, like in clean and comfortable Singapore, to escape this mega-traffic city where the most used word is “macet”, the Indonesian name for traffic jam.